Sign in

    Toll Brothers Inc (TOL)

    Q3 2024 Earnings Summary

    Reported on Feb 20, 2025 (After Market Close)
    Pre-Earnings Price$141.03Last close (Aug 21, 2024)
    Post-Earnings Price$141.50Open (Aug 22, 2024)
    Price Change
    $0.47(+0.33%)

    What went well

    • Toll Brothers anticipates community count growth of 5% to 10% over the long term, supporting future revenue expansion.
    • The company is confident that improved cycle times and increased spec home production will continue to drive delivery growth into 2025.
    • Toll Brothers believes their operating margins are sustainable long term, targeting a gross margin of 27% to 28%, due to their new business model with a wide price range, geographies, and a 50% spec/50% build-to-order mix.

    What went wrong

    • Backlog has been decreasing over the past few years, which may limit future delivery growth. Despite efforts to improve cycle times and increase spec levels, reliance on declining backlog poses a risk to sustaining delivery growth into 2025.
    • The shift towards a 50% spec home model may lead to increased margin variability and potential need to increase incentives if spec inventories build up, which could pressure margins in periods of demand softness.
    • The company expects a 140 basis point sequential decline in gross margin in Q4, due to a shift in mix towards lower-margin deliveries and increased spec homes, indicating potential future margin compression.

    Q&A Summary

    1. Sustainability of Operating Margin
      Q: Is the 17.5% operating margin sustainable long term?
      A: Management affirms that the 17.5% operating margin is sustainable over the long term. They are targeting a gross margin of 27% to 28% and aim for efficiency gains in SG&A to maintain operating margins.

    2. Delivery Growth Outlook
      Q: Can improved cycle times and higher spec levels drive delivery growth into 2025?
      A: Management is very confident that improved cycle times and increased spec homes will continue to drive delivery growth into 2025. They are turning houses faster and expect better conversion rates as the spec strategy matures.

    3. Gross Margin Guidance and Mix Impact
      Q: What is causing the expected decline in Q4 gross margin?
      A: The anticipated 140 basis point decline in Q4 gross margin is due to a mix shift. In Q3, higher-margin homes in the Pacific and the South boosted margins, but this effect reverses in Q4 with fewer high-margin deliveries and more spec homes. Incentives are expected to remain at 5.5% of home price, similar to Q3.

    4. Order Trends and Seasonality
      Q: Should we expect better-than-normal seasonal order patterns in Q4?
      A: Orders in Q4 typically decline 10% from Q3, but management expects to do better than that, possibly achieving flat orders compared to Q3. Improved traffic, lower interest rates, and upcoming community openings support this outlook.

    5. Pricing Power and Incentives
      Q: Are you reducing incentives or raising prices due to recent market activity?
      A: While the quarter was choppy, management notes more pricing power currently. They modestly increased incentives on specs in July but raised prices on build-to-order homes, resulting in overall flat pricing. They expect potential for price increases in the fall as rates potentially decline further.

    6. Share Buyback Increase
      Q: What drove the decision to increase the share buyback guidance?
      A: Strong free cash flow of $800 million to $1 billion allowed management to raise the buyback program from $500 million to $600 million. They intend to continue programmatic share repurchases to reward shareholders and maintain high return on equity.

    7. SG&A Efficiency Gains
      Q: Can you discuss your SG&A outlook and drivers of efficiency?
      A: The company is growing without adding staff, leading to SG&A leverage. G&A dollars are expected to be flat in 2024 compared to 2023 while delivering 10% to 12% more homes and increasing community count by 10% to 11%. Efficiency gains come from organizational changes and technology initiatives.

    8. Market Trends in Texas and Florida
      Q: How is demand trending in Texas and Florida?
      A: Texas is seeing improved demand, especially in August, with good performance in Dallas and Houston. Florida has been softer, with some elevated inventory levels in certain areas, but overall is performing at company average margins and agreements per community.

    9. Spec vs. Build-to-Order Balance
      Q: What are the current levels of spec homes, and are these levels sustainable?
      A: The company had around 3,400 spec homes at quarter-end, with 750 completed units, averaging 1.8 finished specs per community. They are starting one spec for every build-to-order home, maintaining a 50-50 balance, and believe they have reached an equilibrium point.

    10. Community Count Growth
      Q: What community count growth is expected as you aim for 5–10% long-term growth?
      A: Management agrees with the 5% to 10% growth target and plans to provide more details in December.

    Related Publications